With housing finance still in disrepair and little activity in
the way of newly issued, private residential mortgage
securities, a panel of economists, former regulators and other
mortgage industry experts are calling for national loan
servicing standards that they say would promote and accelerate
a market recovery.

More than 50 co-signers took this position in a letter
addressed just before Christmas to Treasury secretary Timothy
Geithner, Federal Reserve Board chairman Ben Bernanke and the
heads of the Federal Deposit Insurance Corp, Federal Housing
Finance Agency, Office of the Comptroller of the Currency and
Securities and Exchange Commission. The letter asserted that
new securitization standards should be adopted now
to address the misaligned incentives and tranche
warfare issues that have bedeviled mortgage servicing
throughout this crisis.

One of the signers is investment banker, risk management
adviser and co-founder of Institutional Risk Analytics R.
Christopher Whalen, who organized the effort and posted
the letter on his Web site. Whalen was joined, among
others, by Brookings Institution guest scholar, housing policy
expert and journalist Martin Mayer; former Federal
Housing Finance Board chairman Allan Mendelowitz; prominent and
often outspoken economists James Galbraith of the University of
Texas; Nouriel Roubini of New York University; former Federal
Reserve and FDIC official Robert Eisenbeis, now chief monetary
economist of Sarasota, Florida-based Cumberland Advisors;
University of Maryland Law School professor Michael
Greenberger, formerly of the Commodity Futures Trading
Commission and Justice Department; and affordable housing
advocate Harold Simon, executive director of the National
Housing Institute.

The dearth of mortgage credit, compounded by reported fraud
and disarray in foreclosures, loan modifications and related
processes, is bad for investors, bad for homeowners and
ultimately bad for a sustainable residential mortgage
securitization market and the U.S. economy, the letter
said. Also at stake, it went on, are the health and soundness
of insured financial institutions that rely on a functioning
secondary mortgage market for liquidity management.

The chaotic situation in the mortgage market today
demands immediate action to ensure all parties are treated
fairly and to restore the confidence needed to support a
recovery in real estate markets and the entire U.S.
economy, said the letter.

It suggested such borrower- and investor-protection
standards as prompt crediting and, when necessary, corrections
of monthly loan payments; tying compensation structures to
effective, long-term management of securitized assets; and
barring commingling of homeowners monthly payments with
servicers assets for any longer than two business
days.

Another point urged in the letter: Be
accountable for lost paperwork on loan modifications and/or for
failing to suspend the foreclosure process when a homeowner is
actively engaged in the loan modification process.

Signs of Additional Support

The letter follows  and cites as encouragement 
a
statement on December 1 by Federal Reserve Board governor
Daniel Tarullo to the House Banking, Housing and Urban Affairs
Committee. Surveying documentation, foreclosure and other
issues that might require structural solutions, and
noting that more loan servicing could be migrating to non-bank
organizations, Tarullo said, It seems reasonable at least
to consider whether a national set of standards for mortgage
servicers may be warranted.

Tarullo appeared to be on the same wave-length as the Whalen
letter-writing group as he pointed to the perverse set of
incentives for homeowners with underwater mortgages and
noted that homeowners who try to obtain a modification of
the terms of their mortgages are all too frequently subject to
delay and disappointment. He concluded that there
is a strong case to be made that broader solutions are needed
both to address structural problems in the mortgage servicing
industry and to accelerate the pace of mortgage modifications
or other loss mitigation efforts.

It remains to be seen how, or how quickly, the regulators
act on these concerns as they pursue the rulemaking mandates of
the Dodd-Frank Wall Street Reform and Consumer Protection Act
of 2010. Those calling for fast action believe that the
regulators can address servicing standards along with the new
risk retention requirement, which will force lenders to hold on
to 5 percent of the assets unless they meet the definition of
qualified residential mortgages. There is no unanimity in the
regulatory community on that point, however.

According to a December 22 report in American Banker, the
FDIC has been quicker than the Comptroller of the Currency or
the Fed to consider servicing standards an appropriate adjunct
to the risk retention rulemaking, but there is a move afoot in
Congress to urge regulators to take up the servicing issue as
well.

Said the Whalen group, We cannot wait for uncertain
future legislation to accomplish something that is clearly
appropriate under the Section 941 risk retention rules of
Dodd-Frank and current law, namely a national standard for loan
servicing.

Summing up why he was one of the 52 who signed the letter,
Allan Grody, a veteran financial industry consultant who is
president of New York-based Financial InterGroup Holdings,
says, I believe there is an urgent need to develop
national standards for mortgage loans to unfreeze the private
residential mortgage securitization market. A new definition
for what constitutes a qualified residential mortgage should be
offered. The situation in the mortgage market today demands
such immediate action to support a recovery in real estate
markets and the entire U.S. economy.

Clifford Rossi, an executive in residence and Tyser Teaching
Fellow at the University of Marylands Robert H. Smith
School of Business, who formerly worked at Fannie Mae and
Freddie Mac and has proposed a comprehensive housing
finance reform plan of his own, says he does not generally
sign on to such statements but supports greater standardization
of servicing practices and believes it will go far in
addressing a number of process deficiencies and gaps that
plague borrowers today. I would actually like to go
farther and in the GSE [government-sponsored enterprise] reform
proposal expected early this year would like to see a national
servicing capability for mortgage-backed securities that carry
a government guarantee.